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Financial Advice

Some Tax Myths Debunked

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Some Tax Myths Debunked
This week I thought I'd take on a few durable tax myths. Free yourself of these misconceptions, and your filing can be a much happier and more productive experience.

Fear of the IRS

There's no reason to fear the Internal Revenue Service. Yes, if you fall behind in your taxes, the IRS can be a very aggressive organization. But the IRS is required to work within a very specific set of regulations, and those rules are usually more beneficial to the taxpayer. Understandably, when most people have to call the IRS, they are already angry and confused. But if you can remain patient and friendly, you may be surprised at how the IRS will go out of its way to assist you.

Using Tax Software

Supposedly, 40 percent of all taxpayers will use a computer to prepare their returns themselves. While you may hear ads saying that tax software is guaranteed to be 100 percent accurate, I would argue just the opposite. What the ads mean is that the mathematical computations the program performs are correct. But that doesn't mean your overall return is necessarily accurate.

The software doesn't control what data you enter. Garbage information entered into the program means a garbage tax return coming out. If you don't understand the questions the program asks, or if you don't know which deductions you're entitled to use, you're out of luck. Furthermore, the best-selling programs aren't written to be occupation-specific—certainly not for performers. Remember, although more than 140 million tax returns will be filed this year, the country's approximately 200,000 members of performing unions amount to less than two-tenths of 1 percent of tax filers. You're a special group.

Using e-File

Some people are concerned that if they use e-file to submit their return electronically, their personal information will be exposed to prying eyes or they have a greater chance of being audited. Neither is true. More than two-thirds of all taxpayers now file electronically, and the IRS has made sure that the process is incredibly secure; it also allows for faster processing. Further, when you mail in your return, the numbers have to be entered into the IRS computer system by hand, which can lead to mistakes requiring a second look at your return—and the more your return is scrutinized, the greater your chance of an audit. Finally, regardless of how you file, once your return is in the computer correctly, the possibility of being audited remains the same for everyone: about 2 percent.

Using Automatic Deposit

It amazes me that some taxpayers are reluctant to put their bank account information on their return, preferring to wait for a refund check from the IRS in the mail. The truth is that it takes the IRS about 30 seconds to find your direct-deposit information (that's why the bank requires your Social Security number). An automatic deposit gets your refund to you about a week faster than a paper check, and it never gets stolen from your mailbox.

Using a CPA

Conventional wisdom says that using a certified public accountant in preparing your return is an advantage, because CPAs have a greater understanding of taxes. This is not necessarily correct. While there are some who specialize in tax preparation, the average CPA has to take remarkably few tax classes to get his or her certification. The average CPA may have a greater understanding of accounting practices as a whole, but that doesn't mean he or she knows anything more about tax preparation. So why waste your money?

If you feel that your return has special needs, the IRS has its own specialization program for preparers, who are known as "enrolled agents." Because they're held to certain educational standards and their qualification for continued certification is determined by the IRS itself, enrolled agents may well be more up to date with regard to tax principles for personal returns than the average CPA.

Requesting an Extension

If you need more time to prepare your return correctly, then by all means file for an extension. But remember, the extension applies only to the deadline for filing your paperwork, not to the monetary payment if you end up owing taxes.

An accurate return is always going to reduce the chances of an audit or some other contact from the IRS. But don't think that by delaying your return you will reduce your chances of being audited. As stated above, once you are in the IRS computer system, your odds are the same as everyone else's.

Incidentally, you have until April 18 this year to turn in your tax return, due to a holiday in Washington, D.C. Nevertheless, I urge you to get it out of the way long before then.

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